Saturday, October 11, 2008

HOT AIR So Far at the G-7 and Tallying the Year in Funds

For those hoping that some concrete and unified plan would come out of the G-7 meeting yesterday, we instead received a lot of hot air rhetoric, no specifics, and an indication of squabbling going on behind the scenes. NYTimes.comIf nothing emerges over the weekend from the meeting of the finance ministers other than rhetoric, then we will probably have more losses in the market early next week. No one wants to hear the refrain "calm down" or we are going to whatever is necessary without giving any details of a coordinated worldwide response. It also does not help to hear the ECB President Jean Claude Trichet continue to talk about fighting inflation when devastating deflation is sweeping the globe. Bloomberg.com: Worldwide He is keeping interest rates at least two per cent higher than necessary under current economic conditions and this is only adding to the problems.

It is difficult to view the carnage in mutual funds so far this year, so I just looked at the funds that I did not own this morning. Fidelity Magellan is down 48% year to date. Fidelity Fifty is down 47%. The Fidelity Freedom 2010, which is supposed to be a conservative fund for people retiring in 2010, is down 25%. The Third Avenue Value fund run by legendary value investor and an old professional Marty Whitman is down 46%. I am not picking on these funds. Declines of 40 to 50% are the norm with some bond funds touted as good being down 20%. We all know that a fund which suffers a 50% decline has to appreciate by 100% from that level to return to where it started the year. I am not optimistic now that the market will recover as quickly as it did after the 1987 crash. So far, in the current meltdown, we have just exceeded by a few per cent the decline from the high on August 1987 of 2722 to the 22.6% fall on Black Monday in October 1987 to around 1738. It took almost two years for the market to reach its August high (week ending August 21, 1989 to be precise) But that was not the end of it. By January 1991 the Dow average was back to 2500. The bull move that would last until the Nasdaq and internet bubble was about to start but the patient was in recovery for almost 3 1/2 years according to my analysis. I suspect that this recovery period may be longer, maybe five years, even if it does not become materially worse from this point forward. The great depression scenario is still on the table.

An article in the WSJ pointed out that corporate bonds are feeling the pain. As you would expect junk bonds are faring worst with Merrill Lynch saying the average yield for them as a class rose to 17% this week. In this kind of crisis, there will be a wave of defaults but money can be made in this area for those who are risk averse. I noticed one junk rated issue, one notch below investment grade, trade down yesterday to 20% of its par value, a senior debt obligation maturing in less than 4 years, and yielding just on the coupon 35% at its last price. I have to nibble on it recognizing that no one knows now how bad it will get. With the amortization of the spread for 3.5 years, I calculate a return of over 135% annually, and all I need to have happen is survival for 4 years. Maybe it is already priced at near bankruptcy recovery levels, but many were surprised how little was left for the Lehman senior bond holders. I am not talking about Ford or GM but I am not going to name it until I make a nibble.

I thought about buying a TC containing a Ford bond at $3.5 on Friday but decided against it for now. It will soon go ex interest. The symbol is KSK and it has a $25 par value with a 7.4% coupon with a maturity in 2046. But needless to say, to recover your investment at $3.5 you only need four interests payments of $93 semi-annual payments. So if the current price of this debt is a good reflection of Ford's prospects, then the market says it will last no more than 2 more years. After two years, a buyer now of that debt would at least have all of his money back. It is rated well into junk at CCC. Unlike many TCs this one is priced about the same as the underlying bond in the bond market based on my last observation of it.

I have forgotten the rule on converting a regular IRA to a Roth IRA but I am going to force myself to read more about it before Monday. My initial reaction is that now may be a good time to make this conversion, which I was intending to do at some point anyway, since the value of the regular IRA is, how shall I say, fallen in value by more than I care to think about.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.